ECB Will Continue To Hike Rates To Slow Inflation?

The EUR/USD and The GBP/USD Markets Were Bearish Yesterday, Will It Be The Same Today?

The ECB's monetary policy meeting in Frankfurt is to be held on Thursday 8 September.

What can we expect?

The Governing Council normally meets twice a month at the premises of the ECB in Frankfurt am Main, Germany. The Governing Council assesses economic and monetary developments and takes monetary policy decisions every six weeks and bases its monetary policy decisions, including the evaluation of the proportionality of its decisions and potential side effects, on an integrated assessment of all relevant factors. This assessment builds on two interdependent analyses: the economic analysis and the monetary and financial analysis. At Thursday's meeting, a decision will be made whether interest rates will be raised again. When prices in European economy are rising too fast and when inflation is too high – increasing interest rates mey help bring inflation back down. The Governing Council may discuss another important step on the path to normalizing interest rates that was signaled at the previous meeting. This decision is based on the Governing Council's updated inflation risk assessment.

Does economy data influence on hiking intrest rates?

The European Central Bank has raised interest rates for the first time since 2011 in July '22 to tackle eurozone inflation that increased to 8.6% ta those oeriod. In a surprise move, the ECB pushed its base rate up by 0.5 percentage points, after economists had expected a smaller 0.25 point rise. The economy on the old continent is slowing down. This is due to high inflation, greater uncertainty and supply problems. These factors significantly obscure the prospects of our economy for this year and the following years. German Manufacturing PMI dipped to 49.1, down from 49.3 in July. It was a similar story for the eurozone Manufacturing PMI, which dropped from 49.8 to 49.6. After the publication of data from Germany the euro has weakened. The euro's fall to parity against the dollar for the first time in two decades also poses problems for the ECB – letting the currency fall exacerbates inflation, but the opposite approach could hit growth. Also, as of July 2022, the inflation rate in the European Union was 9.8 %. The current rate of inflation in the EU is higher than at any other time. High inflation has become the dominant concern of citizens in many countries. After this data, there is a high probability of an increase from 50bp to 75bp. Future interest rate decision will largely depend on the latest data. The initiative is aimed at helping to achieve the inflation target of 2% in the medium term.

ECB’s Monteary Policy

The pandemic and the war in Ukraine have fostered inflationary forces. So central banks have had to shift their focus from tackling low inflation to combating high inflation. The ECB’s monetary policy response to the higher inflation outlook can clearly be rationalised based on the new strategy – in particular its symmetric inflation target. The new ECB strategy has contributed to a more solid anchoring of inflation expectations at 2%. Monetary policy decisions taken by the ECB’s Governing Council since July 2021 have been firmly grounded in the strategy. In a rapidly changing world, the ECB’s monetary policy strategy will likely need to be reviewed and adapted more regularly.

Source: Eurostat.com, Investing.com, ecb.europa.eu

The EUR/USD and The GBP/USD Markets Were Bearish Yesterday, Will It Be The Same Today?

Kamila Szypuła

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Kamila has a bachelors degree in economics and a master's degree in finance and accounting, specializing in banking and financial consulting

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